California's Economic Forecast: Gloomy

Report predicts state will be held back by job losses

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The forecast said the state's unemployment rate would reach a high of 12.1 percent in the fourth quarter of 2010.

California's economic recovery will be stymied by massive state work force cuts that could boost the unemployment rate to more than 12 percent and restrain growth even after housing markets stabilize, according to an economic forecast released Tuesday.

The quarterly Anderson Forecast from the University of California, Los Angeles predicted that 60,000 government positions would be eliminated as lawmakers try to reduce the state's $24.3 billion deficit, making tepid growth likely until early 2011.

An economic recovery "will be held back by a rising tide of former state employees conserving their spending while they seek work in the private sector," Anderson Forecast senior economist Jerry Nickelsburg said in the report. "The impact, which will be felt in the coming year, is decidedly negative and will retard economic growth in 2010."

The forecast said the construction and retail sectors will continue shedding jobs, and the state's unemployment rate would reach a high of 12.1 percent in the fourth quarter of 2010. Unemployment will not dip back into the single digits until late 2011, the report said.

The state's unemployment rate was 11 percent in April, the last month for which Employment Development Department statistics were available.

"The stalled California economy is simply not producing the jobs required for the new entrants to the labor force over the next couple of years to prevent these elevated levels of unemployment to persist once the job layoffs cease," Nickelsburg said.

The forecast was released as state lawmakers wrangle over a budget proposal that was likely to include billions of dollars in cuts to education, health care and social spending.

Legislators clashed over the cuts, fee increases and plans to borrow from local governments, with Democrats divided over whether to push for tax increases and Republicans saying they won't provide the votes needed to raise taxes or to endorse cuts in prison budgets.

Nickelsburg said in an interview that a failure to reach an agreement could tip the state into dangerous territory.

"Then you don't have the legislators and the governor figuring out what should be cut and what shouldn't. You have things like across-the-board slashing, and that's inefficient," he said. "Out of all the bad options, that's the worst. Unfortunately, it's not just an academic option. We see examples of this all the time."

The forecast was most optimistic in its discussion of the housing market, which forecasters predicted was due for a recovery later this year now that prices had become more affordable and housing supply was coming in line with demand.

The state's overall economy will begin to pick up in 2010 and will grow at normal levels by the beginning of 2011, the forecast said.
Forecasters also said personal income would remain stagnant through the first half of next year, but that new opportunities in alternative energy — along with new investment in medical technology, software and research — would result in faster than average growth in personal income in 2011.